Retirement Planning Decisions: Choices Between Defined Benefit and Defined Contribution Plans

Abstract

As states move toward offering defined contribution retirement plans as an alternative or addition to traditional defined benefit pensions, they need to consider the preferences and long-term consequences for different groups of employees. This study looks at which plan employees choose when given the option of either a defined contribution or defined benefit plan. The strongest driver of that choice is education level where the most educated prefer defined contribution plans and the least educated stay in defined benefit plans. A unique contribution of this study is that we include region of origin as a study and determine that cultural differences influence plan selection. The study also explores the role of sex, age, and tenure. Challenging other studies on financial planning, these findings indicate that sex and age are not significant factors. This research was conducted using data from more than 4,000 employees from Florida International University and an interview with HR professionals. By understanding retirement preferences in a more nuanced way, we can better craft our approaches to retirement security and financial literacy training in public sector organizations.

Comparison of the costs of the defined-benefit and the defined-contribution schemes under an actuarial methodology

“…All of our results are free of the main historical errors that are made when comparing these schemes. Namely Different amounts, requirements and conditions for earning the benefits are assumed in each scheme (see (Ali y Frank, 2019;Almeida y Fornia, 2009;Flores-Quiroz, 2007;Ilmanen y cols., 2017;Johnston y cols., 2001;Ortiz y cols., 2019;Robbins, 2018;Schrager, 2009;Williamson y cols., 2009;The World Bank, 1994)).…”

“…Ever since the instalment of the first defined-contribution system in history, in Chile in 1981, there has been an endless debate as to what is the best choice for a pension scheme. In the past few decades we have seen several works stating that one of the schemes is better than the other, either for the employer, or for the worker (see, for example (Ali y Frank, 2019;Almeida y Fornia, 2009;Flores-Quiroz, 2007;Ilmanen, Kabiller, Siegel, y Sullivan, 2017;Johnston, Forbes, y Hatem, 2001; Milanés-García-Moreno, 2013; Organisation for Economic Co-operation and Development, 2015; Ortiz, Durán-Valverde, Urban, Wodsak, y Yu, 2019; Robbins, 2018; Senado de la República. Coordinación de Comunicación Social, 2016a, 2016bSchrager, 2009;Williamson, Shen, y Yang, 2009;The World Bank, 1994) and the references therein).…”

Public Administration and Macroeconomic Issues: Is This the Time for a Marriage Proposal?

“…According to a 2017 Annual Retirement Survey, many workers "were not saving enough to fully fund their retirement income needs" (Transamerica Center for Retirement Studies, 2018, p. 8). Widespread investment illiteracy also worsens the situation (Ali & Frank, 2019).…”

Retirement and the Sectors: Do Private and Public Personnel Differ in Their Retirement Decision?

“…In addition, with regard to the research on retirement, a great deal of work has concentrated on investigating differences between sectors regarding employee financial planning. The primary focus has been on the recent trend in public organizations to adopt “private” retirement programs that transfer retirement planning responsibly from the employer to the employee (Ali & Frank, 2019) and the positive effects of this shift on worker behavior (Hira & Loibl, 2005; Holland, Goodman, & Stich, 2008). Yet, it is unclear whether these effects will also affect the actual decision to retire.…”

“…While retirement-related issues in the public and private sectors are characterized by key similarities, certain issues may be more associated with the public sector, especially regarding the structure of the pension plans (i.e., defined-benefit [DB] plans vs. defined-contribution [DC] plans) and financial pressures (Ali & Frank, 2019; Clark, Pathak, & Pelletier, 2018). These issues may affect the decision to retire in a manner different from what might be expected in the private sector, yet studies actually examining the differences between sectors regarding retirement behavior are scarce.…”